Lets deepen a little bit on what is Bitcoin!
The Bitcoin, a free and open currency
Bitcoin is the first free and decentralized currency that works across the globe without any central authority. Bitcoins are not only impossible to spoof or fake, but they also represent the first neutral global currency that is separate from politics. All thanks to a clever use of mathematics and cryptography.
Bitcoin, a virtual wallet
Bitcoin can be compared to a wallet of cash. Just like a real wallet, it is possible to keep your money and protect it yourself (encrypt
your wallet). Or, it is possible to store money in an online bank such as Coinbase.
Multiple addresses to pay and be paid
To receive money
the Bitcoin software allows you to create Bitcoin addresses
in one click. A Bitcoin address is nothing more than a mixture of letters and numbers. If you give your address to a friend, he can pay you Bitcoins
to this address and you will receive them within minutes. Each address that you create is associated with a private cryptographic key that your Bitcoin software keeps for you. This key is used by the software to sign each transaction, providing tamper proof that you are the owner of this address. Without this key, nobody can make a transaction with your Bitcoin address.
The blockchain, a shared transaction log
Unlike cash, any transaction conducted on the Bitcoin network has to be processed, validated and stored in the shared transaction log, called blockchain. This blockchain contains all transactions across the world. And it is what allows network to know if a transaction can take place. For example, sending more money from a Bitcoin address than what this address has every received.
Bitcoin mining to validate the timing of transactions and create bitcoins
When a user makes a transaction on the Bitcoin network, it is distributed all over the network. The authenticity of the payer and the availability of funds is instantly checked. And the recipient is credited. However, there is one last step before the transaction becomes valid and included in the blockchain. Bitcoin network must ensure that if a user tries to spend the same money twice, only one of the two transactions will be accepted. This network must then meet three requirements.
- A chronological order of transactions.
- A consensus on accepted and rejected transactions.
- A neutrality, so that nobody can influence the consensus.
To meet these criteria, the Bitcoin network requires that each addition brought the blockchain (one block) contains a cryptographic signature based on the previous block. Which already establishes a unbreakable chronological order. And in addition, the cryptographic signature is a mathematical puzzle very difficult to solve. The resolution of this puzzle becomes a lottery. The first user to find the solution is rewarded by collecting transaction fees it has processed and new Bitcoins created by writing a new block in the blockchain. If the proposed block fails a single cryptographic rules, it is rejected by the entire network in a fraction of a second.
This is called Bitcoin mining
. In summary, Bitcoin mining is a free market where individuals can invest in hardware and make them available for the network and who are rewarded proportionnally to their investment. Bitcoin miners therefore ensure the operation, security and neutrality of the network. Any individual with technical skills can become a Bitcoin miner. And each new Bitcoin miner increases the difficulty of the network, making it more powerful and safe and preventing Bitcoin miners get rich without competition.
A stable and deflationary monetary creation
Bitcoin algorithm is designed to create a total of 21 million BTC (bitcoins) by the end of a specific date. Until this, the creation of money decreases every year and never increases in speed. The value of Bitcoin is therefore impossible to manipulate and always perfectly represents the supply and demand of the market. This is why the value of Bitcoin is very volatile. And this is also why Bitcoin is deflationary, which means its value increase over time. Because Bitcoin is a scarce currency whose quantity is fixed. Exactly the opposite of classic money that loses value over time following the injection of new money per central bank policies.
If Bitcoin was to receive a significant market share adoption over the next few years, its value would increase significantly. This is also why Bitcoin is divisible. Which means that it is possible to exchange small amount of money such as 0.0004BTC (4.00 mBTC). Thus, Bitcoin could theoretically meet the needs of a wide scale.